For Stocks, The Fuse Is Lit

Stocks ended the day roughly flat, with the Dow (INDEX: ^DJI) and the broader S&P 500 (INDEX: ^GSPC) up just 0.03% and 0.17%, respectively. Note that, despite the fact that Mr. Market finally found his footing after a dismal post-election performance, the VIX Index (INDEX: ^VIX) did not retreat. It appears that investors are finally beginning to price the ambient uncertainty somewhat reasonably. (The VIX, which is based on S&P 500 option prices, is an indicator of the market's expectations for short-term stock price volatility.)

The macro view: In the wake of this week's election, the White House and Capitol Hill indicated that the 'fiscal cliff' is firmly on the agenda -- and none too soon -- as both House Speaker John Boehner and President Obama spoke publicly on the topic today. There's not even a blueprint for an agreement yet, but the fact that there appears to be political will to sit down and find a compromise is encouraging. Nevertheless, investors need to be aware that, given the constraints of the Congressional calendar as the year winds down, averting the fiscal cliff will require a determined effort from politicians, and will likely to go down to the wire. Expect the fiscal cliff to be one of, if not the dominant factor, driving a schizophrenic 'risk-on/ risk-off' market through the end of the year.

Naturally, some stocks are more exposed to this type of political risk than others. I happen to think the fiscal cliff poses an existential tail risk for mREITs that depend heavily on wholesale financing, including Annaly Capital Management (NYS: NLY) . If you're looking for a comprehensive assessment of Annaly's risks -- and its upside -- click here to receive the Fool's premium report on the shares, which includes 12 months worth of updates.

The article For Stocks, The Fuse Is Lit originally appeared on Fool.com.

Alex Dumortier, CFA has no positions in the stocks mentioned above; you can follow him @longrunreturns. The Motley Fool owns shares of Annaly Capital Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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